Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

Regular AAC (Asset Allocation Composite), SAA and TAA portfolios are always rebalanced on the first trading day of a month. the next re-balance will be on Tuesday September 1, 2020.

Please note: As of March 1, 2020, we officially phased out our old rebalance calendar for both SAA and TAA. They are now always rebalanced on the first trading day of a month. 

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Sound Investment Strategies

In this week’s newsletter, we will do a little bit soul searching: refreshing the old concept of ‘sound’ investment strategies. We then will look at some of those portfolios/strategies we have followed for a long time. 

What is a sound investment strategy

We have touched this topic several times in the past. The following are two relevant ones:

Every now and then, we always remind ourselves to refresh these basic concepts as they can be easily swayed/forgotten because of strong prevailing market conditions. We strongly suggest readers to (re)read the above newsletters, even you did read them sometime back. 

Specifically, a sound investment strategy should possess the following properties:

  • Well defined rules or behavior — rules should not be changed (often), otherwise, it’s not a strategy. What you see from financial publication and media are mostly either random subjective opinions or a snippet of information that’s not much useful if one does not know the complete set of other rules. For example, if some expert says he’s bullish on the current market, he doesn’t give you any other information such as when he will become bearish and under what conditions he will behave differently (reduce allocation, switch to other funds, etc.). Without knowing this, you are essentially given a direction and following it blindly. 
  • The rules have strong intuition and fundamental backing that’s simple enough to understand— there are so many so called ‘good’ strategies that turn out to be just some statistical flukes: pure luck or coincidental. Furthermore, there are way too many tweaked strategies that become too convoluted and hard to explain. These so called ‘good’ strategies are often subject to so called ‘data snooping’ sin — they are modified or fit to produce ‘better’ backtesting results.  Our favorite example of a sound strategy with strong intuition and fundamental backing is the ‘buy and hold’ of stock market aggregate (i.e. a broad base index) for a long time, quoted from the previous newsletter: 

… in a healthy capital economy, business owners will eventually gain above inflation returns as a whole because otherwise, they would simply choose to invest in cash or inflation linked debts. Notice nobody can guarantee a particular company will succeed in delivering such a return in the long run. But if you choose the whole stock market (that represents all businesses that have staying power), you can avoid individual company picking problem.

  • The strategy/portfolio should have long term historical performance. Better yet, it should have been monitored for a long time live. 

The last point is what has motivated MyPlanIQ from day one: we want to keep track of a set of popular strategies and see how they have performed. We have done that for 10 plus years. In the following, let’s look at some of those strategies/portfolios listed on Advanced Strategies page. 

Advanced strategies review

Well, it looks like our long running representative GTAA (Global Tactical Asset Allocation) portfolio (our TAA portfolios are using a similar strategy  Tactical Asset Allocation(TAA)) P GS Global Tactical Include Emerging Market Diversified Bonds isn’t that bad at all: 

The following chart shows its total returns compared with VFINX (S&P 500) and VBINX (60% US stocks/40% bonds) since 1998:

So it double or almost triple money against the other two funds for the past 22 years. Furthermore, it does it with only about one-third of maximum drawdown (peak to trough loss), compared with VFINX. 

Return table (as of 7/31/2020):
Ticker/Portfolio Name YTD
Return**
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 1998
P GS Global Tactical Include Emerging Market Diversified Bonds 2.2% 6.5% 3.3% 5.0% 7.0% 9.4% 11.6%
URTH (iShares MSCI World) -2.2% 6.2% 3.0% 4.8%      
VFINX (Vanguard 500 Index Investor) 2.3% 11.8% 11.9% 11.3% 13.7% 8.8% 7.4%

Though its recent 5 year return is not as stellar as VFINX, it actually has outperformed iShares MSCI World index URTH consistently for the past 1, 3, and 5 years. 

Though we have since advocated a modified version (Asset Allocation Composite (AAC) strategy or see November 18, 2019: Introducing MyPlanIQ Asset Allocation Composite Strategy), we are still a firm believer in the soundness of this strategy. 

The TAA strategy satisfies the strong intuition backing requirement: asset prices do exhibit strong momentum in a long period of time, just like in a real physical world. It’s also simple enough to understand. Our implementation of the strategy has been the same since day one. 

Similarly, even the recent laggard P Momentum Scoring Style ETFs and Treasuries is now performing: 

Portfolio Performance Comparison (as of 7/31/2020):
Ticker/Portfolio Name YTD
Return**
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 2001
P Momentum Scoring Style ETFs and Treasuries 12.7% 14.3% 7.1% 5.2% 8.6% 8.2% 8.5%
VFINX (Vanguard 500 Index Investor) 2.3% 11.8% 11.9% 11.3% 13.7% 8.8% 6.9%

It also did it with about 1/3 of maximum drawdown of VFINX. 

Other ‘sound’ portfolios that have been doing well include the following: 

Portfolio Performance Comparison (as of 7/31/2020):
Ticker/Portfolio Name YTD
Return**
1Yr AR 3Yr AR 5Yr AR 10Yr AR 15Yr AR Since 2001
STS Seasonal Timing Using VFINX Total Return Bond Fund As Cash -1.4% 9.0% 11.4% 10.0% 12.7% 10.9% 10%
P Shiller Cyclically Adjusted PE 10 SO SU Stock Market Timing Strategy Weekly Total Return Bond Funds As Cash 7.1% 11.1% 6.4% 6.1% 9.6% 10.6% 11%
VFINX (Vanguard 500 Index Investor) 2.3% 11.8% 11.9% 11.3% 13.7% 8.8% 6.9%

Again, both of them possess strong and simple intuition backing. 

To summarize, though the selected portfolios in the above might not perform as well as S&P 500 recently, they nonetheless have maintained strong and better historical returns (and their recent returns are not bad either in an absolute sense) with much lower risk. The point we are trying to make is that investors should evaluate a strategy using the above yardsticks and stick to them for a long period of time once committed.  

Market overview

Some subscribers have questions on the recent behavior of our tactical strategies like AAC. At the moment, what we are seeing is that though major indexes such as S&P 500 are now firmly in an uptrend, the general market internals are still not robust enough. For example, both more conservative utilities stocks and cyclical financial stocks are still in a downtrend, which often reveal a very unstable market condition. Furthermore, it’s been widely reported that the recent returns of major indexes have been dominated by a very few large tech stocks as shown in this chart by Bloomberg (top 5 stocks vs. the rest of 495 stocks in S&P 500): 

Though our strategy doesn’t take current affairs such as Covid19 pandemic into account, both market internal conditions and valuation reveals a still unstable and fragile condition of the current markets. The pandemic induced stress will be soon resolved, one way or the other. Subjectively, we believe that It’s worth the wait for a more robust condition. 

Finally, we want to show that our AAC strategy did wait till the end of June in 2009 to come back to stock markets: it didn’t sacrifice much as the index was almost flat (slightly down in fact) in June that year: 

In a word, we call for patience and emphasize the following: 

  • For strategic allocation (buy and hold) investors, ignore the current market behavior. Remember, as what we have emphasized numerous times, when you choose and commit to a strategic portfolio, you essentially know and commit that your investment horizon (or the time you need to utilize this capital) is 20 years or longer. As we pointed out, if your investments are those diversified (index) funds such as an S&P 500 index fund (VFINX, for example), you know your money is in some solid ‘business’ that eventually (20 years later) will deliver some reasonable returns. As long as you are comfortable with this thesis, you should sit tight and forget about the current gyration.
  • For tactical investors, again, you have to ignore the current market noise. Furthermore, you should follow your strategy rigorously, especially in a time like this. Human emotion, both optimistic and pessimistic, and human desire, both greedy and fearful, are your worst enemies. This has been shown to be true time and time again.

In terms of investments, stocks are somewhat cheaper. Investors should not be swayed by the current market volatility and economic distress, instead, they should stand ready to take advantage of the opportunities. For most Americans, we offer the following Winston Churchill’s remark made in the darkest days of World War II: “The Americans will always do the right thing, but only after they have tried everything else.” As a country, the US (and the rest of the world) will get over this, as always, even after stumbles. The past development has been very supportive to our optimistic long term view so far. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot.

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–Thanks to those who have already contributed — we appreciate it.

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